U.S. promotion agency revenues reached an estimated $5.2 billion in 2005, up 23.5% from the year before. That’s nearly double the increase that agencies reported in 2004, and shops are projecting a 25.7% increase for 2006.
More than half (56%) of promo shops saw revenues rise last year, per PROMO’s Industry Trends survey of agency executives. Another 29% reported revenues were flat; 14% said their revenues fell. Averaged out, revenues rose 23.5%.
But clients are pressing profit margins down, wringing what they can from retainers.
“There’s been more margin pressure over the last 24 months than anytime I can remember,” says The Marketing Arm CEO Ray Clark.
Blame ever-increasing demands for ROI, which also pushes shops into stringent research — sometimes reimbursed by clients, and sometimes not. That’s got shops buying analytics tools and even research firms.
Promo shops are also investing to build multi-cultural marketing expertise (mostly homegrown, with some acquisition), as well as digital and newmedia expertise to meet marketers’ hunger for technology innovations.
Personal technology (think iPods and cell phones) figures more prominently as consumers get more comfortable and feel in control, not overwhelmed, says Digitas Senior VP-Promotions Steve Greifer. “Consumers are dictating their relationship with marketers,” as widespread adoption of personal devices let marketers target more tightly, he says
Roster vs. AOR
Agencies are adjusting to “roster” status, a result of procurement policies of marketers who pare down their list of shops and cut compensation deals. Roster shops are less secure than agencies of record, and often have to pitch against other roster shops for projects, spending $100,000 to $300,000 (on time, research and resources) per pitch. “It’s incredibly taxing on an agency’s resources, but as an industry, we taught clients to do that,” says The Marketing Store Worldwide President-U.S. Agency Services Clive Maclean, who blames rampant RFP-chasing of 2001-03 for fostering the pitch mentality.
It also taught clients to fish for ideas via RFPs with hypothetical budgets, because agencies bent over backwards to respond. That has faded; there are fewer “junky” RFPs, says PowerPact CEO Alison Glander, and shops are vetting them harder.
Procurement hasn’t trickled down from big CPGs like agencies feared. About 23% of RFPs went through procurement departments last year, per PROMO’s Industry Trends survey. And procurement has gotten “more enlightened,” says Draft Executive VP Tina Manikas: “It’s about value for money, not just money, and procurement departments play a background role as clients consolidate below-the-line marketing around a [marketing] person who takes a more forefront role.”
Staffing across the industry is up about 8%, per PROMO’s Industry Trends survey. Full 29% of agencies added headcount in 2005; 51% stayed even; 9% cut staff. Toughest to find? Creatives who know promotion strategy. “I don’t think our industry trains creatives except in creative,” Glander says. Meanwhile, some publicly held shops rely on contractors and part-timers to maintain profit margins.
As 2006 unfolds, watch for more ad work from a handful of promo shops — and increased competition from ad shops hankering for “through-the-line” billings. Media agencies offer promo overlays as a plus-up to ad buys, while promo shops angle for dollars previously earmarked for media.
SNAPSHOT 2005
Revenues reach $5.2 billion, up 23.5%
Research drives acquisitions, pitches
Marketers adopt “roster” relationships
Where’s the well-trained talent?
| Revenue change (%) | Agencies reporting (%) |
|---|---|
| 20% or more | 22.4% |
| 11% to 20% | 17.8% |
| 1% to 10% | 10.5% |
| Flat | 28.9% |
| -1% to -10% | 3.3% |
| -11% to -20% | 3.9% |
| -20% or more | 5.9% |
| Unspecified gain | 5.3% |
| Unspecified loss | 1.3% |
| No answer | 0.7% |
| Source: PROMO 2006 Industry Trends Report | |
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